The seen and the unseen – benefits, and the taxes used to finance them


This week, Pensions Minister Steve Webb MP described the views of the authors of Sharing the burden – How the older generation should suffer its share of the cuts as “loathsome”. It’s an opinion I’m sure a lot of people in the media and many of the commenters, on the IEA blog and on others, were pleased to see. However, where exactly does that sort of comment get us in the political debate?

Steve Webb supports government policy to raise pensioners’ fuel bills by an average of £150 as a result of highly inefficient “green” initiatives. When at the Institute for Fiscal Studies (which is to a large degree government-funded, unlike the IEA) he wrote a paper supporting VAT on fuel at the full rate (a move that would load another £150 cost onto pensioners). I believe that the savings proposed in the Sharing the burden should be used, for example, to pull poor people out of tax – he obviously disagrees. Perhaps I should describe his position (which would leave more poor people paying tax and higher fuel bills) as “loathsome”; but such cheap dismissals would get us nowhere.

There are serious issues here. The implicit national debt being passed to the next generation is 500%-600% of GDP (and this is nothing to do with bankers). These serious issues deserve serious consideration on their own merits,  not insults.

A particular criticism aimed at the paper regarded the headline used to sell it. Like many a headline this did not cover the full story; however, it is a matter of fact that when it comes to the cuts the old poor are being treated differently from the young poor and the old middle class are being treated differently from the young middle class (whether you look at benefit uprating, pensions versus child benefit uprating or move on to other issues such as student fees). Now, there may be valid reasons for this, but it is not “loathsome” to point this out. It seems clear to me that the reason for this choice by politicians is because of the weight of old people in the electorate (this has been clear since at least the 2005 election). The old are not seen as a soft touch by the government as suggested by some commentators in this debate – far from it. Indeed, it seems that the main Conservative Party policy at the forthcoming Scottish elections is to give pensioners (and only pensioners) a £200 Council Tax discount. Council Tax is a real burden for many pensioners; but it is also a real problem that under 40s cannot afford to buy a house.

Another complaint of many correspondents concerns the various sneaky ways in which old people are having their incomes cut by the government. And I entirely agree. As the tax burden has become higher and higher the ways in which the Treasury has put its hands into people’s pockets has become more and more sly. The taxation of pension fund dividends from July 1997 is one obvious example (which will really damage the coming generation of older people) but there are other more recent ones such as the CPI indexing of certain benefits (and accrued public sector pensions). This should not happen. If the government wants to cut benefits by, say, 1% it should be brave and say so and not do it through the back door. I hope my critics might give me credit for being brave – I do not believe in these back door ways of reducing benefits and increasing taxes.

And now to the main point… Every penny of the spending reductions proposed in Sharing the burden would be used to finance tax reductions. The desire to balance these spending cuts was very clear in the press release. These particular suggestions for cuts form part of a bigger project which will yield very large proposed savings and very large corresponding tax cuts.

Some commenters have suggested that pensioners do not pay tax and others have suggested that they need the benefits because the taxes they pay have increased so much (there is obviously a contradiction between those two views and the second is correct). All pensioners pay tax (even if below the income tax threshold). VAT and other indirect taxes probably take about 20% of their income (though that depends on individual spending patterns and the total level of spending). If you take account of the additional domestic fuel costs that the government is making everyone pay through its various green initiatives then those costs alone will represent about two thirds of the Winter Fuel Allowance – more for a badly insulated or large house. The cuts proposed in the paper would more than reverse the rise in VAT that has recently taken place.

Clearly not every penny of the money saved by cuts to pensioners’ benefits would be used to cut pensioners’ taxes but we will be suggesting further cuts to other areas of public spending which will allow much further tax cuts, cuts to VAT, energy costs, fuel duty and an entirely new way of financing local government. I cannot say that every single pensioner would receive more in tax cuts than benefit cuts as we do not have the models to show that at the IEA, but it would come pretty close to that point. Poor pensioners would be protected by a much neater method of means-tested benefits than the current one (and no less generous).

And this really gets to the root of the problem. The government is spending 53% of national income and even after the cuts it will be spending 45% of national income. Would we prefer it if we kept more of our own money in the first place or do we want money to be taken away from us, passed to another government department and then given back to us with conditions attached (in the case of bus passes) or if we fill in a six page form (in the case of Winter Fuel Allowance)? I believe that people should be able to keep more of their own money in the first place. People are fully entitled to argue the opposite but it is not “loathsome” to take my position. These benefits are relatively recent (all post-1997) and they have been given in an era when taxes (including on the old) have increased dramatically. The benefits are very overt (which is why people protest); the taxes that finance them are very stealthy (which is why people do not necessarily realise when they are imposed).

Finally, people might legitimately complain about the headline on the press release (our decision) and the headlines in the media (not our decision). I do not necessarily expect journalists to read the underlying paper (and see it in the context of the others we are producing) but they might at least reach the point near the beginning of the press release where it said (in italics): “These proposals should be part of a more radical review of government spending than the one on which the government has embarked. It should be stressed that this review would lead to huge tax decreases – including tax decreases that would benefit the old, such as a large cut in VAT.” I do accept that we could have used a headline that went something along the lines of “Older people should pay less tax and receive fewer benefits” but then I can guarantee that the issues would have receive no airing in the media whatsoever.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

5 thoughts on “The seen and the unseen – benefits, and the taxes used to finance them”

  1. Posted 03/03/2011 at 10:53 | Permalink

    Give credit where credit is due! Thank you Philip for enlightening us on what MAY BE the thinking behind all this! It must be recognised, however, that the matter of pensioners’ current situation is a very sensitive one and even the prospect of making adjustments such as reducing tax in return for the reduction in benefit is a tricky one. It depends on which comes first, the tax reduction or the loss of benefits. Will the two be able to work in unison? This I doubt, history will show that the loss will come before the gain never the other way round! Then there is the matter of those who do not pay tax, how will they “gain”?

    These are difficult times but that does not mean that those who have experienced several difficult times in the past should have to face yet another, it was because of those past difficult times that those generations constructed an imperfect welfare system to protect future generations from such pain. Now it looks as though the next generation(s) will still have to carry the burden left to them by the recent generation of inept/blinkered governments!

  2. Posted 03/03/2011 at 13:16 | Permalink

    thank you, Malcray. Perhaps I should add that this was very much us suggesting that we think government “ought” to do. And, yes, i think, everything should have been considered at once in a much grander comprehensive spending review.

  3. Posted 03/03/2011 at 17:16 | Permalink

    Well done for having the courage to say the truth – you wouldn’t make a good politician though!
    It’s all rather surprising – when one considers that one minister in the present government wrote a book about intergenerational transfers (David Willetts) another minister finds a similar position ‘loathesome’.
    I found the comments you made here about benefits being tangible, whereas withdrawals are much less noticeable, very interesting. On the monetary side, the inflationary/loose money policies of the Bank of England is probably the biggest form of covert taxation of pensioners – especially when QE itself is being used to fund the UK’s own deficit spending and loose money to prop up house prices. Thus pensioners are having their savings devalued to pay off the debt that the government has run up (in part) to provide those same pensioners with services (services they are better off providing themselves with anyway). They complain about the services being reduced, they may even complain that their savings are being eroded but I’d wager that 1 in 1,000 couldn’t tell you that who’s doing it and why.

  4. Posted 07/03/2011 at 11:14 | Permalink

    Somebody like Steve Webb ought to know better than this. He has been long enough in the policy arena to know that the more ideas and the more perspectives, the better. Ministers really ought to be expected to be more polite than anonymous bloggers. And to be aware that Nick Clegg, David Laws, David Willetts and many other members of the government are on speaking terms with the IEA.

  5. Posted 07/03/2011 at 12:36 | Permalink

    And that David Willetts wrote a book that made the points in much more detailed and explicit terms than I did…

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